Now pensions wrecked by new 20% cut

MILLIONS of retired people face having their pensions slashed by 20 per cent because of changes in the way payouts are calculated.

UK NOW PENSIONS WRECKED BY NEW 20% CUT Retired people are facing pensions being slashed

New rules on how annual pension increases are linked to inflation risk ruining retirement plans by devaluing incomes for pensioners, experts said last night.

They fear companies with final salary pension schemes will continue to adopt Government changes to how inflation is assessed – meaning a lower annual pension rise for the retired. Nigel Green, of financial consultants deVere, said: “This could wreak havoc on pension funds and I’m baffled that very few people seem to be aware of it, let alone causing a fuss about it. It appears to be slipping through almost unnoticed.”

Saga’s Dr Ros Altman described the change as “shocking”, saying: “Pension inflation is already much higher than national inflation. The cost of the things they buy are going up by more than their pension goes up.

“Whereas the majority of householders spend money on items such as clothing and electrical goods, pensioners spend a lot of their money on food and energy. As these have risen more in price than other goods, pensioners find themselves harder-hit.”

The Government has changed its benchmark of inflation from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). CPI is lower than RPI because it does not take into account a number of housing and living costs including mortgage interest payments and vehicle licensing. The lower rate of inflation measure means pensions would not increase as much.

Mr Green said: “Changing the index from RPI to CPI will have a significant, negative effect as CPI is generally 0.5 to one per cent lower than RPI. Each year individuals with a final salary scheme could receive a one per cent less increase in their pension payments.”

The cost of the things they buy are going up by more than their pension goes up

Dr Ros Altman

The drop means a man retiring at 65 and living until he is 85 could see pension payouts eroded by a fifth, despite years of cautious financial planning.

Dr Altman said: “Pensioners are very concerned about their pensions being devalued. They are already worried about the cost of living. If you only increase pensions by CPI inflation, pensioners become poorer and poorer.”

According to deVere, many pension schemes have already switched from RPI to CPI indexation, saving firms like BT and BAE Systems £3.5billion and £348million respectively.

Mike Post, leader of a campaign by 30,000 British Airways pensioners against the switch, said: “Even the cleverest of people can be unaware of the importance of a change, especially when it is compounded over many years in retirement.”

As well as pensions, RPI changes will also affect the value of savings certificates and Government-issued bonds.

The switch is subject to a consultation by the Office for National Statistics, with the result due next month.